Things to Avoid Before Bankruptcy: Item 6 – Paying Ahead on your Mortgage or Car Loan

Sixth in a Series of Bankruptcy Don'ts

By Dave Kelly, Minnesota Bankruptcy Attorney

This is the sixth in a series of posts about the top seven things I recommend you avoid if you are considering a Chapter 7 or Chapter 13 bankruptcy.

Paying extra on your mortgage or car loan might ordinarily be a prudent thing to do. You might even have been advised to do so by a financial adviser or guru. But if you are thinking about a Chapter 7 bankruptcy, or even a Chapter 13, this is probably a bad idea. You are not sure to have trouble with your case if you have been making some extra payments, but the risk that something might go wrong is probably higher because of this. In the old and clanking gears of my legal mind, I can see three ways you could have a problem with this.

The assumption that I am making in this discussion is that you have a car or a homestead which is going to be exempt in your bankruptcy case, and there has been some action by you which increases the amount of the equity in the exempt car or exempt home.

Intent to Defraud, Hinder or Delay a Creditor

I’m talking here about the provisions of 522(o) of the bankruptcy code. It has an intent element. It only applies to your homestead, not your car; and it only applies if you have put extra money into your homestead with the intent to hinder, delay or defraud a creditor. If you are only making a few small extra payments on your mortgage, I would expect it would be very difficult to prove this intent element. But if you are putting a relatively large amount into the house, either by paying the mortgage or by doing a home improvement, you need to have your lawyer screen for a possible problem with this.

To the extent that your trustee can prove that 522(o) applies to a portion of your homestead, that portion is not exempt. That portion will be an asset that the trustee in a Chapter 7 can claim for the creditors. If you can’t figure out any other way, a sale of your home might be required to make this equity available.

Examples I see in the case law include using money from the sale of stock and using money form a large tax refund. Of the various reasons I can see that you might run into trouble for making an extra payment on your mortgage, this is the least likely one on the list. Still I am concerned about the possibility – it’s my job to be concerned.

Fraudulent Transfer – Effort to Hide Assets from Creditors

This is a more likely source of trouble. If you have money or another asset which you take and use to make an extra payment on your mortgage or car loan, a bankruptcy trustee might claim that this is the same as if you gave it to your brother to hold for you so that creditors would not get it. It can be considered hiding money from your creditors. The legal term for this is “fraudulent transfer.”

I have a whole list of questions which I ask potential clients to try and screen for fraudulent transfer problems. There’s a lot more ways this can come up than just extra payments on mortgages or car loans. In Minnesota we have two distinct fraudulent transfer statutes that we have to be concerned about. One provision is in the bankruptcy code itself – this one seems to have no intent element, and the lookback is two years. The other provision is the state fraudulent transfer statute – which looks back six years but at least has an intent element: intent to hinder or delay or defraud creditors.

You are most likely to have a fraudulent transfer problem involving something that happened shortly before the bankruptcy case was filed. Events from more than two years back might not be as much of a problem.

With Homes or Cars that are Upside Down, your Payment could be a “Preference.”

You might want to take a look back at my blog post about item 3 on my list of things to avoid – large payments to unsecured creditors. The bankruptcy code makes some attempt to treat all the unsecured creditors equally, and this involves clawing back large payments which favor one unsecured creditor over another.

So what’s this got to do with a mortgage or car loan? Those are secured, not unsecured. Well if you are upside down on your loan, meaning that you owe more than the security is worth, the loan might be considered unsecured or partially unsecured. In this event the trustee might try to claw back from the creditor ALL the payments made in the 90 days before the bankruptcy is filed. If you’ve been paying extra, it just makes it that much more tempting.

Once the trustee has taken the payments back from the creditor, the creditor will very likely add that amount back in to what you owe. And if you want to keep the car or keep the house, you will eventually probably have to pay it. If this problem arises, you might want to try making a deal with the trustee where you pay in the money so he or she doesn’t go after the creditor.

Conclusion

These are problems that I am always trying to find in advance before filing a case. In many cases I see something that could be a problem, but probably won’t be. Other times it looks pretty serious. If you have been paying extra on your car or home, make sure you give all the details to your lawyer. Your lawyer should be able to advise you how much of a problem it might be.

Disclaimer

This post is for general information purposes and is not legal advice. It does not create an attorney-client relationship. Small details in your case can make a big difference. Consult the attorney of your choice concerning the details of your case. I practice in Minnesota. Laws and practices may be a lot different in your state.

Minnesota Bill Collectors Going Out of Business?

Hennepin County District Court

Collection Agencies Going Out of Business?
Collection Agencies Closing Offices? Economy Worse then Expected?

Is the economy getting so bad that the bill collectors are going out of business?  From where I sit it appears that at least two of the old tried and true bill collectors have moved out of Minnesota.  When a bankruptcy case is filed, it is very important to be sure that all the creditors are being notified.  The notices are sent out to the creditors by US Mail by a central noticing center which is operated by the court.  When an address is bad or when a notice comes back in the mail in connection with one of my cases, I get notified of that right away by email from the clerk of court’s office. In cases where a collection agency has taken over an account, I always try to list both the original creditor and the agency in the bankruptcy papers.  If the debt has also been referred to a lawyer, I list the law firm on the list of creditors too.

For as long as I can remember, Allied Interstate has been one of the big collection agencies in these parts.  In recent times their office was within a few blocks of mine.  They were located in that big, white office building on the northwest corner of the intersection of I-394 and Highway 169 known as the Interchange Tower.  There was more than one occasion when I was about ready to go over there in person and yell at them.  To me they were an institution, kind of like the federal government.  It never occurred to me that they would not always just be there.  In bad economic times, I would have assumed that their business would have just gotten all the better.

You might imagine how shocked I was to receive a notice, and then another notice, telling me that the address I was using for Allied Interstate was bad.  Well, they had apparently been assigned a number of debts of a couple of my clients – so I had to find a new address for them.  At first I assumed that they had just moved to a new location in their old neighborhood.  As I almost always do when I have such a problem, I went to Google looking for a new address.  There were no results for Minnesota except what I already had.  I went to Bing.  Same result.  Next I tried to call all the phone numbers I could find for Minnesota locations of Allied Interstate.  More shock – they were disconnected.  Finally I stared trying locations outside of Minnesota.  They had been a nation-wide operation.  The first few numbers I tried were not being answered.  Finally someone answered at an Allied Interstate office in Ohio.  He said to use the following address:

Allied Interstate, PO Box 4000, Warrenton, VA 60197-6123

So I added that address to the list of creditors at the court web site for both of my cases, and it seems so far to have been a good address.  Meanwhile a notice that I had sent to an Illinois office of Allied Interstate came back in the mail as well.  One has the impression that this outfit is not doing so well.

Not long after this business with Allied Interstate, I received notice that an address I had been using for one of the bill collecting law firms was bad.  They were it seemed to me a lot like Allied Interstate in that they had been around forever.  To me they seemed to be one of the top law firms that over the years had driven many of my clients to my door.  Their office had always been in St. Paul, but they sued people from all over the Twin Cities.  Again I went to Google and several other sources.  What I found or seem to have found is that they closed their St. Paul office and are now doing business from their home office in another state.

From day to day I see little indicators – including the above – that the economy is worse than anybody in the media outlets wants to admit.

This is for general information purposes only, is not legal advice, and does not create an attorney-client relationship.  I am a debt relief agency, helping people file for relief under the federal bankruptcy code.